Work In Progress - WIP

  

See: Work-in-process Inventory.

Work in progress is used today in many, more "casual" contexts, but the OG use of the term is from the supply-chain management sector. Work in progress is used to describe goods that are partially made, but not yet complete. If these partially made goods had their own smartphones with Facebook on them, “work in progress” would be their status.

Their relationship status with the factory? “Complicated,” predictably, since they’re glad they are being made, but are aware they’re not done yet, so….that’s awkward. Work in progress, or WIP costs, are put on the balance sheet at each stage to help determine overall costs that went into making said goods. Each stage that goes into making the goods has its own WIP costs, which are all added up to get the total cost of the final good. This includes the obvious (raw materials and labor) as well as the not-as-obvious (don’t forget overhead costs).

Related or Semi-related Video

Cost Accounting: What is Work in Process...1 Views

00:00

And finance Allah Shmoop What is work in process from

00:05

a cost accounting perspective Aren't people you make a little

00:11

side money selling homemade tea cozies shaped like Nobel Prize

00:15

winning economist Milton Friedman This guy also used to be

00:19

a runway model is your best seller But you also

00:22

do some brisk business in Friedrich Hayek as well To

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make them you need some fabric some insulating foam some

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thread some buttons for the eyes some yarn for the

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air though you don't need much yarn there for Friedman

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Those items represent your raw materials In accounting terms They

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are called your direct materials When you're done you've got

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your completed cozies You post them on your website and

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you wait for orders to come in in accounting Speak

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Those are your finished goods But what about when they

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are You know in between what they called when you're

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just doing the cutting or the working or the sewing

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and they're not done yet Well the cozies Yeah they're

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partially good or partially finished They're not fully finished goods

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but you've done some work on them They're too far

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along to reuse the raw materials somewhere else You kind

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of committed that raw material to that finished product You

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can't just list these products either as direct materials anymore

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They're just kind of like used up raw materials in

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the process of being done right And that's why they're

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called a work in process magic Well you take a

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bunch of fabric cut it in the shape of Robert

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Shiller so on one of the eyes and then you

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get a call from your mother You know she just

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got an email from your Uncle Harry begging her to

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send in money again Trouble is well your uncle Harry

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died in two thousand twelve so you rush over to

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your mom's before she can Long into her PayPal account

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And well meanwhile you've got half of Robert Shiller just

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sitting there on your kitchen table It's not direct materials

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anymore It's been cut in half sewn in semi used

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But it's not finished goods either No one's going to

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buy a half finished Robert Shiller So how do you

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classify that Cozy Yeah it's a work in process or

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work in progress Spork Whip w Well this partly done

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situation is common in business Manufacturing processes can involve a

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large number of steps and can require large amount of

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time tio go from beginning to end In the build

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a lot of dough gets tied up in work in

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process at a large manufacturer If you constrain line the

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waste well then it can save you a ton of

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capital costs and businesses Do periodic inventory counts Toe optimize

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all this They count up their direct materials and record

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how much of them are still waiting to get used

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to just sitting around They're costing rent money for the

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capital that was deployed to build them thereby um the

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value of that material then gets listed in the firm's

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financial statements and those amounts add up like think about

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a major truck maker with a billion two hundred million

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dollars worth of partially made trucks lots of expensive steel

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parts lots of electronics lots of tires and plastic parts

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all waiting to get you know put together So then

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there are finished good and they can be shipped off

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to a you know dealership or car A van near

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you will think about the financing on that amount of

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money The truck payers paying seven percent a year on

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the one point two billion dollars in inventory capital that

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it's holding at any given time Well that's eighty five

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million dollars or about a third of the company's earnings

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Seven percent on a billion to is a lot of

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money for a low profit margin carmaker So then applying

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proper accounting practices the business tallies the amount of finished

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goods it has sitting in its warehouse just like it

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did with direct materials inventory The firm then calculates the

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value of its finished goods or its final product That

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figure then gets listed in the firm's financial statements as

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well as inventory But the inventory isn't done yet There's

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one more step work in process has to be actually

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counted and then added to the inventory value with work

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in process stages a sensitive part of the whole shebang

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Once the products are finished you can then sell the

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inventory You can't sell it until they're done If the

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business hits a rough patch or has to liquidate itself

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like it's going bankrupt And just as the cell for

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parts well the finished products can get sold for cash

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even if prices have to get cut dramatically Those finished

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product still have value the work in process not so

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much like you can think about a ninety eight percent

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finished car that just needs a waxing Yeah you could

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probably auction that for a modest discount But a half

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built car you know Good luck with that Well a

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similar story happens with just raw materials like Think about

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it in practice here a truck maker with a warehouse

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full of tires can extract some value by liquidating the

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unused tires But once they're on a truck and they've

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been driven around for eighteen miles testing things well they

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can't really be returned to the tire maker or sold

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us anything close to newly priced tires So if you

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have a truck that's half made tyres installed but the

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vehicle isn't roadworthy doesn't have bumpers or you know a

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streaming music service already set up in it Well then

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you don't have a truck you Khun Cell and you

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don't have parts that you Khun Cell or return It's

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pretty much the worst of both worlds like un Miley

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Cyrus While tracking work in process figures allow the company

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to give a complete financial picture of its inventory Yeah

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partially done stuff and fully done stuff and you kind

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of add the two values together So what happens Well

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you stop your mom from sending money to the fake

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Uncle Harry turned out the call was a prince of

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Nigeria sort of thing She is so happy you saved

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her from getting scammed She offers to invest in your

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cozy business at a very high valuation to you Then

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you use the money to build the factory and hire

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some employees Now you make ten thousand cozies a month

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You buy one hundred fifty thousand dollars of raw materials

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get started on your expanded cozy business Your workers start

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making little Paul Krugman's and Gary Beckers each cozy cell

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for fifteen bucks After three months it's time to put

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together a financial statements for your first quarter of operation

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Well what happens It was part of the process You

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conduct an inventory taking time It's been three months and

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you've made thirty thousand total cozies Now there's five thousand

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dollars worth of materials in your store rooms just sitting

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there Meanwhile you've sold twenty five thousand cozies over that

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three months The quarter there earning total revenue from sales

05:57

of three hundred seventy five thousand dollars Meanwhile there are

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five thousand finished cozies sitting in the warehouse ready to

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sell the value of those cozy stands at seventy five

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grand That's five thousand cozies times the fifteen dollars sale

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price for each That's net in sales to you and

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you're carrying your inventory at the price that it's expected

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to sell for And that's a controversial that might be

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a high price to carry that But you have so

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many advanced orders coming it's probably fair accounting to hold

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them there because you know there are more or less

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spoken foreign soon out the door Anyway that seventy five

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thousand dollars figure well it goes into the financial statements

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seventy five grand worth of finished inventory Well what else

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is going on here You also find that five hundred

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cozies are in process works in process at the time

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you calculate the value of the inventory you're holding on

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the balance sheet So on average there about a half

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done So at the close of your period this quarter

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you've got net two hundred fifty cozy equivalents in your

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W inventory Their value goes on the books as thirty

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seven hundred fifty bucks in the work in process inventory

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right Because they're half done or half the sale price

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that they would be a tte the goose step seventy

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five hundred bucks price So that's five hundred cozies half

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finished giving you two hundred fifty net finished cozy equivalence

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Each one value fifteen dollars So two hundred fifty times

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fifteen is Yeah three seven five zero for the inventory

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reckoning And that's it That's how you do your books

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You got your finished inventory You're partially finished inventory or

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inventory in process Your total him up And that's the

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total value of your inventory Yes and Milton Friedman would

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be so proud Or at least Uncle Harry Wood Oh

Up Next

Finance: What is work-in-process inventory?
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